*contains graphic material

Cory Doctorow makes some good points in this piece. In essence his argument is that the digital platforms touted by movie studios as piracy alternatives (including Warner Bros, where I work), do not match the service of physical DVD and Blu-ray retailers, therefore moving consumers to infringement.

In essence, the UK Open Rights Group (which Doctorow co-founded) has conducted research which has found that digital retailers (like iTunes) are 30-50% more expensive than DVD or Blu-ray retailers and with vastly reduced range, and often delayed releases. In that context, little wonder users turn to copyright infringement.

This matches my experience. Warner Bros has been at the forefront of trying to change this, however, by being the first studio to go day-and-date, and by aggressively transitioning catalogue titles to digital.

There are however a lot of problems with his piece.

1. If digital services are poor when compared to physical retail, why isn’t this pushing consumers toward physical retail, rather than copyrightinfringement? If the argument is that a reasonably-priced, wide-range retail offering will convert infringers, why has this obviously not happened?
2. On the question of range, how does Doctorow know that it’s unavailability of titles that is pushing consumers to infringe copyright, rather than the fact it is free? Although data on piracy is hard to find and harder to verify, any I’ve ever seen suggests that it’s mostly major blockbuster films – widely available on both physical and digital platforms – that is being pirated.
3. On the same question of range in the digital market, why does Doctorow appear to blame studios? In my experience, a studio will sell any title that a retailer is willing to buy – of course they will. If retailers sensed any genuine consumer demand for these niche titles that Doctorow claims is fuelling piracy, then why aren’t they requesting them from studios? The answer is obvious – there is little demand for these titles. Studios and retailers have not beefed up the range on offer through digital services because they’d prefer to focus their demand on titles that the consumer wants. Does Doctorow really think that adding BAFTA winners like The Purple Rose of Cairo (1985), The Savage Voyage (1971) and Shakespeare in Love (1998) to the iTunes store is going to stem piracy? A quick look at Google Insights for Search shows pretty much zero interest in torrenting any of these titles.
4. Similar point on pricing: why does Doctorow blame ‘Hollywood’ for the street pricing, which is set by retailers? Furthermore, over 80% of the market for home video is still physical product – if a Hollywood studio set out to undercut their biggest customers (like Amazon) with some of their smallest customers (like Apple), they would be in a great deal of trouble. Doctorow does realise these are companies trying to make money doesn’t he?

All in all, I’d love to look at the ORG research. But on the basis of Doctorow’s summary it sounds every bit as selective and misleading as anything Hollywood has come up with.

[This post is a response to the estimable Geordie Guy's Tumblr post on Netflix/Arrested Development. I'd have obviously posted this as a comment on his original post, but Disqus would not let me (having signed up for a commenter account with Disqus it allows me to comment on seemingly most other Tumblr blogs except Geordie's. If I can ever get it working I will post it there and delete this)].

The background is that Netflix, the USA-based over-the-top video provider with 24m subscribers is producing a new series of Arrested Development, to be made available exclusively to their subscribers.

Geordie’s post in summary:

Starting in 2013, yet another copyrighted creative work will be screened exclusively to consumers of a particular [service] and exlusively to those who live in the contiguous 48 states of the USA.

[...]

[A]fter this, the rest of the world or those Americans who are not Netflix customers, will access the same creative work by infringing on they rights holder’s copyright.

[...]

The studio executives and rights holders will continue to be bewildered as they make less money, year after year.  Some rights holders and studios will cease making copyrighted works like this, and will bitterly blame piracy for the now absent profitability.

This post makes a number of assumptions:

1. That Netflix don’t know what they’re doing. Netflix’s strategy in developing Arrested Development and the David Fincher-Kevin Spacey project House of Cards is not to drive revenue, it’s to drive subscriber footfall. It’s a loss-leader. Furthermore this strategy makes enormous sense. With licensing costs going up, offering exclusive, unique, desirable content is one of the few ways left to turn a profit in today’s content marketplace: it’s the HBO strategy, the BSkyB strategy, the Foxtel strategy, and it’s a proven one.

2. That Netflix will not make this content available outside the USA. With the NBN well and truly on the way Netflix are reportedly in talks with local ISPs to set up an Australian operation in the next 12 months. I would put the possibility of a local Netflix by 2013 at better than 50%. Even if they don’t open an operation it could well be that they license iTunes to sell day-after episodes outside of the US. (More likely, however that they’ll shoot for TV licensing and DVD sales, as I’ll explain).

3. That Netflix would actually make more money by going day-and-date with the USA. Based on the DVD sale rate and the ABC2 broadcast audience, factoring in piracy, Arrested Development’s true fan base in Australia is realistically less than 50k. For newer shows like Community, Treme, The Walking Dead, Parks & Recreation, it’d be 20k maximum. It might be hard to believe when you pay attention to the connected, savvy, early-adopter hyper-consumers on Twitter, but the segment who are fans of brand-new TV from the USA is an incredibly small niche – even in the States the audience for shows such as this is considered pretty niche.

If you took the option of selling Arrested Development direct, day-and-date, worldwide, with a video-on demand offering you’d stand to make $800k revenue at most (approx $17 per season, based on 13 episodes x $1.20 each). And that’s not taking into consideration the marketing costs of reaching and converting those 50k fans, and overheads. You’re left with a figure so tiny that it’s no wonder studios might not bother.

Instead, they prefer to have one licensing conversation with an overseas TV network and take the money. In that instance, for a niche property like Arrested Development it can actually be preferable to delay the content in other territories by 6 months. After the show has launched in the USA, and hopefully become a hit, the demand and potential audience in Australia will grow markedly due to word of mouth. The TV licensing deal will be much bigger – but if you’ve already sold the property into Australia through video-on-demand you will command a much lower licensing fee.

Sometimes this strategy doesn’t really work: The Walking Dead, first aired in the US in October 2010, will not screen in Australia until 2012, which is clearly too long, and much longer than Fox will have wanted. However, the second season of TWD will air day-and-date on Foxtel at the same time as the USA – this is a risk however, and Foxtel will need to over-invest in marketing to see a return.

4. That addressing copyright infringement is the key strategic issue for studios. Obviously, the possibility of consumers quickly and conveniently downloading and viewing copyrighted content at no cost is going to eat into profitability. You might assume, as indeed do a great many people, that this is therefore the overriding strategic issue that publishers must address. Then, when they don’t appear to, you might think that they’re stupid.

I can’t say too much about the legal aspects of the issue, but here are some points about copyright infringement, most of which are widely acknowledged:

• It is confined largely to one segment of the population. About a third of the population admit to it, with the 80/20 rule very much in effect within that third. That is, a very small portion of the population is responsible for the vast majority of infringement.
• Infringement does not appear to have increased over the past several years (at least not for movies/music).
• The vast majority of infringed video content can’t be considered a lost sale – in most cases, people infringe on content that they wouldn’t have an interest in spending money on anyway.
• Most importantly: beyond legal remedies it’s not clear that anything can really be done about infringement. Even if studios cut prices by 50% and rapidly expanded distribution hubs, it’s by no means clear the growth in sales to converted infringers would offset the decline in revenue from loyal buyers. There is no cheaper price than $0; why wouldn’t habitual infringers continue to opt for that?

The bigger challenge is making content that the vast bulk of consumers want to pay for, and delivering it to them in the ways that they want to watch it. Studios are definitely not ignoring this challenge, especially considering the margin on digital distribution is much higher than the margin on physical DVDs or Blu-rays. The Netflix/Arrested Development deal is actually a great example of this, and I wouldn’t be surprised if it doesn’t come to Australia as well. Yes, it won’t immediately address infringement; but so what?

There are actually plenty of digital distribution points in Australia: iTunes, Playstation Store, Foxtel On Demand, Telstra T-Box, Fetch TV, XBox Live, Quickflix, with launches by YouTube, Netflix, Amazon, LoveFilm, and perhaps physical retailers all likely just around the corner. Hollywood studios have launched a new streaming standard called UltraViolet, which should increase the value of owned content, and which will launch in Australia at some point.

But in all of these instances studios are at the mercy of distributors (although some, like Warner Bros, are experimenting with selling direct) who aren’t moving as aggressively as they’d prefer. And distributors are at the mercy of their customers, who aren’t telling them they want to migrate to digital en masse, despite what you may think if your research is purely Twitter-based. 30% of Australian households don’t even have broadband, and only a subset of those have a decent-sized download limit. 95% have a TV set and a DVD  player.

The statistic has been quoted thousands of times in the media saying that MW3 is the biggest entertainment launch in history, according to the publisher Activision. The key numbers were $400m in the first 24hrs after launch, purely from the US and UK.

Fair enough – I’ve no doubt the numbers are correct, and I certainly can’t think of anything that might have been bigger in the first day of release. But the ‘first 24hrs of release’ is an arbitrary metric, chosen by Activision purely because it favours the video game medium above others.

When Harry Potter 7.B was released it screened back to back on almost half the screens in Australia for weeks – but in order to have a chance of matching MW3, you would have had to drastically expand the distribution channel: build 100s of new cinemas! No home video product is going to match a big video game because of (a) the difference in price per unit (~$25 vs ~$100) and (b) a lot of the excitement has gone from the franchise by the time it reaches home video. Music and books are a better comparison, and to be fair, MW3 smashes both mediums.

A fairer benchmark I think would be life-to-date franchise sales – representing the total amount spent on an entertainment franchise, in the entire world, ever. And if you were to compare theatrical box office and home video sales of Harry Potter, Star Wars, and Lord of the Rings, I think they’d be easily in front of the CofD franchise. But it may still be a top 10 property, which is a substantial achievement in itself.

The problem with IPTV is that consumers just don’t get what it’s for. With PC or laptop-based catchup TV there’s been strong takeup, but making that leap to accessing OTT services on a connected TV, Blu-ray or set-top box has not been made by most consumers. The major product launches in the space have been either near-total failures (Google TV) or elegant but widely ignored (Apple TV 2.0). The wide variety of solutions and services only adds to confusion, while the distribution rights situation adds to consumer frustration and lowers demand for services.

The easiest way to get IPTV services into people’s homes is through a simple software solution. My ultimate solution would be TV manufacturers including iTunes Airplay software (or similar) in their TV sets. Consumers simply use their smartphones or iPads as remote controls to browse the iTunes store on their TV sets. Apps can be downloaded direct to your TV, enabling access to a whole world of paid-for  content.

The problem here is this would mean consumers making the big leap to thinking about their TV sets in a way that people simply do not – i.e. as an interactive device. And without large-scale household penetration, there won’t be the kind of content distribution deals needed to grow demand for the service.

So there’s a conundrum here, which I’ve expressed below:

Put simply, a software solution is easiest and cheapest, but consumers won’t understand it. A hardware solution will be easier to understand, but consumers won’t be motivated to buy it. There clearly needs to be a circuit breaker in this market.

At the moment I can only see this circuit being broken one way: Apple getting into the hardware game with an iTV screen (mockup below via). Quite simply, the amount of media coverage and buzz Apple can get for a major IPTV launch would vastly eclipse what Sony, Google, Samsung, LG, Walmart, Netflix and everyone else could achieve combined. It would create demand purely by being an Apple product, and the coverage would educate consumers and open up the market for competitors to enter.

Building in the iOS ecosystem would give iTV a range of impressive features, with Airplay, iCloud, the App store, Siri, while Apple has the scale to pull off the best content deals with publishers.  Working with content providers to create iTV content apps would be an amazing way to launch the product.

Even then there’d be some significant hurdles. Keeping down the cost of the hardware would be a massive challenge, for instance, and I’m not sure even Apple could make a $3,000+ TV screen anything more than a top-end luxury item. $2,000 would be more like it (for a 42-inch screen). I’d get one.